Earlier this week, Deutsche Bank's credit strategist Jim Reid suggested that the Covid recession might persuade policymakers that there is no need for a recession again: as Reid put it, so aggressive has been the policy response that the US Covid recession is likely to be the shortest on record in spite of a savage global pandemic. Well, "if you can restore growth so quickly in a period when lockdowns are prevalent, then surely a normal recession will now hold no fear and be quickly reversed."
In a follow up to this rhetorical musing, today Reid has written a longer note in which he picks up his thoughts on the theme of "no more recessions... ever", saying that this trend has been in place on a smaller scale for the last forty years. All four of the cycles since the early 1980s make the top six longest in the thirty-four recorded since 1854 and as today’s Chart of the Day shows these four super cycles have coincided with a unique move to structural deficit financing. Indeed the graph shows other long cycles all coincided with large deficits largely around wars and the New Deal in the 1930s. If it was this easy to avoid recessions why wasn’t it done all the time?
The simplistic answer is that such a policy would have been impossible when money was tied to gold and was only facilitated when the US periodically broke currency ties to gold and then permanently once the Bretton Woods system broke down in 1971. However, for a decade this was highly inflationary and disruptive economically. A miracle then occurred from the early 1980s as we saw a secular four decade structural shift lower in inflation.
Reid then says that in his view, China's re-entry into the global economic system in the late 1970s and the natural demographics of the developed world and China ensured that the supply of global labor (much of it very cheap) surged from this point. This helped ensure that the usual pressure on wages and prices as activity rose through the subsequent cycles was more subdued than it would normally be and fiscal and monetary policy could be kept looser and ward off economic headwinds much more easily. The cost of this was huge debt accumulation and latterly huge central bank balance sheets and perhaps a structural loss of productivity.
So what’s stopping this becoming the normal policy response and thus ending all but short technical recessions going forward? The answer, according to the DB strategist, is likely nothing until either inflation or political constraints arrive.
Indeed, without either policymakers will now likely pursue MMT/helicopter money type policies when the need arises. However, the structural cycle poses risks to this. As the labor supply has now peaked in the key global economies/regions and as globalization is challenged we might hit inflation pressures earlier in subsequent cycles which will provide the biggest challenge to this no recession theory.
Policymakers could soon face more dilemmas than that seen over the last forty years if we are correct but if we are not, the business cycle could be a thing of the past.